New lending caps on NBFCs against funding initial share sales may throw up big opportunities for small players in last-mile financing. Many smaller NBFCs are likely to enter the estimated Rs 80,000-crore short-term funding market, hitherto the preserve of large entities such as Bajaj Finance, IIFL, and JM Financial.

To be sure, the IPO financing market might shrink after the Rs 1-crore limit per borrower kicks in on April 1.

Long-term wealthy investors bidding for less than Rs 50 lakh in an IPO can now have higher allocations in the absence of astronomical bids, dealers said.

“The new regulation is more inclusive where small lenders will find good opportunities to lend investors seeking to subscribe to shares,” said Tushar Bopche, Co-founder of BrainStation India, a start-up incubator involved in the financial markets.

“Genuine high networth individuals will get a better opportunity to apply for IPOs, creating long-term wealth,” he said. “This is not currently available due to concentrated IPO funding.”

NBFCs cannot lend more than Rs 1 crore to investors seeking to buy stocks in initial share sales from April 1 next year, the Reserve Bank of India (RBI) said on Friday.

Until now, wealthy investors borrowed money from large NBFCs that generally charge higher rates depending on the demand for money. NBFCs in turn borrow through commercial papers, or shorter duration debt securities ranging from seven to ten days.

An NBFC can either sell CPs or use internal resources for IPO funding.

“IPO funding is a high-risk leveraging business as you can earn high margins as well,” said Raman Agarwal, Area Chair – NBFCs, Council for International Economic Understanding (CIEU). “Smaller NBFCs with a dedicated focus and expertise on capital markets are likely to get in after the new regulations capping large funding kick in. The objective is to mitigate potential risks.”

Before the first day of listing, these investors strike informal deals with potential long-term buyers and give effect to transactions on the listing day. This coupled with huge subscription bids are said to be resulting in abnormal listing gains.

“Both buyers and sellers set the price levels subject to different conditions. They settle it on the exchange platform – often on the first day,” said a dealer involved in such transactions.

Resource raising could pose a challenge for those smaller entities as funding costs would be higher than at top rated NBFCs selling CPS.

“While some of the larger NBFCs are more active in IPO financing, smaller NBFCs may enter this space depending on how they manage challenges on fund mobilisation,” said Karthik Srinivasan – group head of financial sector ratings at ICRA. “Operational risks could increase in case NBFCs increase the number of borrowers to whom they provide IPO financing.”